A comparative analysis of the CVP structure of nonprofit teaching and for-profit non-teaching hospitals.

Due to the market turbulence facing the hospital industry, the financial viability of teaching hospitals has been severely threatened. Their missions of education, research, and patient care even strengthen this crisis. Therefore, the objective of this study is to conduct a comparative analysis of the cost, volume, and profit (CVP) structure between large nonprofit urban teaching hospitals and small for-profit rural/suburban non-teaching hospitals. The following two hypotheses were developed: (1) large nonprofit urban teaching hospitals tend to have higher fixed cost, lower variable cost, lower total revenue adjusted by case mix index (CMI), and lower return on total assets (ROA); and (2) small for-profit rural/suburban non-teaching hospitals tend to have lower fixed cost, higher variable cost, higher total revenue adjusted by CMI, and higher ROA. Using 117 teaching hospitals and 102 non-teaching hospitals selected from the Medicare Cost Report database in 2005, the results from multiple regression indicated that large nonprofit teaching hospitals located in urban areas are more likely to have higher fixed cost and lower variable cost. While such cost structure doesn't necessarily affect their total revenue adjusted by CMI, it does lead to a lower return on hospitals' total assets. The results support our hypotheses in terms of fixed cost percentage, variable cost percentage, and ROA, but not total revenue adjusted by CMI. The results suggest that cost structure is significantly associated with hospitals' performance. Also, as teaching hospitals' portfolios of services and programs increase (e.g., provision of uncompensated care to Medicare and Medicaid patients and doing research), it becomes strategically necessary and critical to manage the allocation of resources or investments into the fixed capital that supports the business.